How to calculate earnings per share
Earnings per share (EPS) is one of the most important financial metrics used by investors to gauge the profitability and overall health of a company. It measures the amount of net income available to each shareholder and is an excellent way to compare similar companies within the same industry. In this article, we will provide a step-by-step guide to calculating earnings per share.
Step 1: Gather Your Data
To calculate EPS, you need two pieces of financial data from a company’s financial statements:
– Net income
– Weighted average number of outstanding shares
You can find this information on a company’s income statement and balance sheet or on its statement of stockholders’ equity.
Step 2: Determine the Net Income
Net income is the total profit a company generates after all expenses, including taxes and interest, have been deducted from its total revenue. You can usually find this figure near the bottom of a company’s income statement.
Step 3: Determine the Weighted Average Number of Outstanding Shares
The weighted average number of outstanding shares represents an average number of shares outstanding for a specific period, taking into account any stock issuances or buybacks. Look for this information in a company’s consolidated statement of stockholders’ equity or notes to financial statements.
Calculating weighted average shares outstanding requires:
1. Identifying the number of shares outstanding at the beginning and end of the period.
2. Adding new share issuances during the period.
3. Subtracting any shares repurchased (buybacks) during the period.
4. Calculating the weighted average by multiplying each number by its corresponding time weight in the year.
Step 4: Calculate Earnings Per Share
Now that you have gathered all necessary figures, you can calculate EPS using the following formula:
Earnings Per Share (EPS) = Net Income / Weighted Average Number of Outstanding Shares
By dividing net income by the weighted average number of outstanding shares, you obtain the earnings per share figure, which represents the amount of profit that each shareholder could potentially receive per share he or she owns.
Earnings per share is a crucial metric for investors to examine a company’s financial performance. It aids in comparing companies within the same industry and provides valuable insight into how profitable a company is relative to its competitors. By understanding how to calculate EPS, you can make more informed investment decisions and better assess the value of different stocks in your portfolio.